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The perils of helping kids buy a home

With the high price of real estate in the Toronto area, some parents are helping their children buy a first home. It’s always great to help your kids if you can, but you have to think carefully about what you’re doing. This will ensure everyone knows whether it’s a loan or a gift and their obligations going forward.

If it’s a gift, there are no strings attached, but if it’s a loan, there will likely be a second mortgage registered on title to protect the parents. The bank will have to know about it and approve.

In some cases, where the kids cannot meet bank debt-service thresholds because their income is too low, parents are offering to include their own income and then to guarantee the mortgage. This is one solution, but many lenders then want parents on title to the property and to sign the mortgage. This is even if they may hold as little as a 1 per cent interest in the property.

They feel more secure if the parents are on title as opposed to just being a guarantor, although most lawyers could not explain the difference. In both cases, they are on the hook if the kids default.

No matter how small the ownership stake by parents, the deal must be carefully structured. How do the kids get that 1 per cent stake back, if that was what was intended?

Steven Pearlstein, a lawyer from Minden Gross in Toronto, recently gave a seminar about this to several hundred lawyers. There were plenty of questions. For example, if the parents try to transfer the 1 per cent back to the kids without telling the lender, this will actually cause the mortgage to go into default. That’s because the standard terms of a mortgage typically state that the mortgage comes due at the option of the lender, if someone sells their interest.

It is worth noting that even if the parents transfer their 1 per cent share, they are still responsible if the kids don’t make the mortgage payments, since they signed the mortgage originally.

Alan Silverstein, another lawyer at the same event, noted that if the person helping with the loan is perhaps an aunt or uncle, who is not moving into the home, then it could jeopardize the kids’ eligibility for the HST new home rebate, if it is a new home or condominium. This could cost a buyer up to $27,000 if investigated by the income tax authorities. The reason is that if everyone on title is not moving into the new home as their primary residence, or is a direct relation to the one moving in, like a parent-child relationship, then the buyer does not qualify for the rebate, even if they own 99 per cent of the property. An uncle, for example, is not considered a direct relation under the Income Tax Act.

It was suggested that the parents leave their 1 per cent share to the kids by just doing an amendment to their will, so the kids would end up with it later. Without a will, problems could arise later if other beneficiaries do not wish to co-operate and want to sell the home to get their share of the estate.

Another suggestion was for the parents to state at the time of purchase that they held the 1 per cent in trust, so that it could later be transferred back to the kids with no tax consequences at all. The problem with this is that if the property value falls and the parents are sued by the lender to pay for any shortfall, the parents might later try to argue that if they never intended to take the title to the 1 per cent and the lender somehow knew about this, they were not responsible to pay any deficiency.

Sometimes it may be necessary for the kids and parents to have a different lawyer advise them, as there may be conflicting interests.

So it’s not that simple. The best thing is to make sure that, before parents offer to help kids purchase, they get legal advice to make sure that everyone is properly protected.

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